Monday, October 20, 2008

New Crisis Remedies

France, Japan, IMF, U.S. In New Crisis Remedies

By Mike Peacock and Daniel Trotta, Reuters | 21 October 2008

Reuters— France's President Nicolas Sarkozy addresses the European Parliament in Strasbourg October 21, 2008.

LONDON/NEW YORK (Reuters)— Japan and France extended more help to banks, the IMF prepared to intervene in trouble spots around the world and the Fed devised a new plan to inject liquidity into money markets on Tuesday to curb the worldwide financial crisis. Interbank lending costs came down again, offering tentative signs of renewed confidence in the financial system, after weeks of bailouts and rescue plans appear to have cooled the worst crisis since the 1930s Great Depression.

Governments around the world have promised about $3.3 trillion to guarantee bank deposits and bank-to-bank lending, and in many cases have taken stakes in struggling banks. "The likelihood of a global catastrophe has in fact declined over the past couple of weeks," said Glenn Stevens, Australia's central bank governor. The U.S. dollar rallied to a year-and-a-half high against a basket of currencies on Tuesday as investors and companies continued to deleverage.

The stronger dollar, in turn, sent gold down nearly 4 percent and oil prices fell. Japanese stocks closed 3.3 percent higher and European shares reversed earlier gains to trade lower in the afternoon. But the Dow moved lower amid concern over U.S. earnings reports for the third quarter. U.S. chemical giant DuPont cut its 2008 earnings and major asset manager BlackRock Inc reported profits that came in below market expectations.

Some countries were still seeking help. The International Monetary Fund stood ready to help Pakistan, which said it needed up to $15 billion to avert a balance of payments crisis. Ukraine also said it was close to agreeing to measures to allow it to receive aid. Iceland as well appeared close to a deal with the IMF.

French And Japanese Plans

Shares in top French banks rose sharply after the government moved to lend 10.5 billion euros ($14.12 billion) to six banks to boost their capital reserves. In Japan, Economics Minister Kaoru Yosano said the country's big banks could get public funds if needed, as the government considered recasting a law aimed mainly at regional banks to speed the flow of finance to credit-starved small firms. "I can't see any reason why big banks should be discriminated against," Yosano told a news conference.

Analysts say major Japanese banks may not need the help, having largely avoided risky credit products. The Federal Reserve launched yet another facility to provide liquidity, pledging to fund purchases of certificates of deposit and commercial paper from money market mutual funds. "This is a very big event," Laurence Fink, the chairman and CEO of BlackRock, told a conference call.

"It will allow people like BlackRock and other money market funds to start extending our purchases of CP. ... We can take on commercial paper way beyond one day, if we want 180-day or whatever, we can buy that paper now," Fink said. There were other signs the global efforts were paying dividends. Interbank dollar, euro and sterling borrowing costs fell and spreads narrowed on Tuesday, giving further evidence that money markets— the arteries of the global financial system— continued to recover from the virtual paralysis following the demise of Lehman Brothers in mid-September.

British bank Barclays was close to issuing a 3-year note to raise at least 1 billion pounds, an indication that British government rescue plans were helping. But the crisis is not likely to end until central bank and government support is removed and bank-to-bank lending— frozen for much of the last year by uncertainty over which groups faced financial disaster— is flowing freely again.

In the meantime, the world teeters on recession. Euro zone economic growth will fall to just 0.2 percent next year with the bloc's biggest economy, Germany, stagnating, the IMF forecast on Tuesday. "Day by day, the evidence builds that we are facing a serious economic slowdown," European Commission President Jose Manuel Barroso told the European Parliament.


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